Economy

In 1997, I had approximately $500,000 of assets sitting in a 401(k) at T. Rowe Price. The funds represented a portion of the money I saved while working on Wall Street. After I left the Bush Administration, I used these funds, along with the proceeds of the sale of my house, to start a company called the Hamilton Securities Group.

It was not long before Hamilton Securities was successful and repaid my 401(k) the funds that had given it life.

A few years later, the federal loan sale program for which Hamilton served as financial advisor was the target of a highly politicized "investigation" by the federal government. A new Housing Secretary was eager to assist the Federal Reserve and Treasury in engineering a housing bubble: honest people had to go.

After a year of beating back false allegations, the government put my 401(k) under audit. My company's chief financial officer and I looked at each other and said, "Uh-oh." Somebody was trying to prevent me from borrowing the money.

Sure enough, a few months later the U.S. Department of Housing and Urban Development (HUD) created a pretext to withhold monies owed to Hamilton and demanded several hundred thousand dollars of contract close-outs. Our bank received anonymous tips which persuaded them to pull our credit line. Our insurance company breached its obligation to fund our attorneys. And (surprise, surprise) our auditors said that the audit meant I could not arrange a loan from my 401(k) to Hamilton Securities. We were to learn in time that the auditors were quite dirty in the affair.

Fearless by nature, I closed out my 401(k) without blinking an eye, paid $225,000 in taxes and penalties, and loaned the remaining money to Hamilton Securities for contract compliance and legal expenses. I hired an excellent attorney on contingency and sued the federal government for the monies owed.

And we eventually won.

The moral of the story was that if you stand in the way of the largest housing bubble and pump and dump in history, it pays to have a nest egg.

After winning the case, my accountant hoped that some or all of the settlement would repay Hamilton's legal expenses. Thrilled at the possibility, she said, "The first thing we'll do is set up a new 401(k)."

"No," I said. "I will never have an IRA or 401(k) again." To this day, I never have. Fool me once, shame on you; fool me twice, shame on me.

I assumed that my situation was unique - I hold highly visible positions - and that most people had nothing to worry about. There are numerous benefits to building savings in a 401(k) or IRA, although many of these plans are restricted in their investment choices. With persistence, someone can usually make such investment vehicles work for them. So, I had never considered the possibility of overt or covert confiscation of IRAs and 401(k)s until I read one of Franklin Sanders‘ comments about gold confiscation:

"Finally, gold and silver today don't represent the huge pool of wealth they represented in 1933. [Solari note: the US government confiscated gold in 1933.] Why risk wide-spread disobedience to steal such a tiny plum? If the government wants to steal a big pool of wealth, they'll snatch your pension funds and IRAs, not your gold."

Bloomberg put out some interesting news regarding the silver market stating that refined silver output in China has peaked and it could stop growing because less will be produced as a result of halting of mine expansions, higher costs for production and lower prices received for the metal itself.

Zhou Juqiu, chairman of the gold and silver division at the China Non-ferrous Metals Industry Association, said in an interview. Output may rise to nearly 10,000 metric tons this year from 9,092 tons in 2007, he said. Silver prices have more than halved from an 18- year high in March after hedge funds and speculative investors sold commodities to raise cash, while recession fears reduced demand for industrial use of the precious metal.

China's annual silver output growth already slowed to 10 percent last year compared with an average 30 percent between 2001 and 2006, Zhou said. `There won't be much growth going forward'' in the next few months, Zhou said. While producers are still ``doing ok,'' they are faced with an increasingly difficult environment, including tighter financing and reduced export market, he said.

In July China revoked the export rebates on silver to control use of limited natural resources. This will force China to rely on imports to fill the needs for the precious metal. "China has the world's biggest potential for silver consumption,'' said Li Xiaoni, vice president of China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters.

The country's consumption already accounts for 70 percent of the global total for industrial use, she said. China's consumption of silver has grown by over 10 percent recently reaching 4,000 tons last year, Zhou said. China has 26,000 tons of silver reserves, about 9.6 percent of the global total, and the fifth biggest in the world, he said. About 60 percent to 70 percent of China's silver is the byproduct of smelting for lead, zinc and copper, he said.

This is the third and final paper in the Is America Broke series. In the first two articles, several of the contributing factors to today's financial crisis were discussed. Several important questions were asked:

Why is the most advanced economy in the world buckling at the knees, acting like a punch weary fighter? How did the largest creditor nation on earth become the largest debtor nation? Are soaring debt levels consummate with wealth creation or a diminishing standard of living?

In the process of finding answers to these questions, we were led to the root cause of our economic problems: the monetary system itself, and more specifically - the unit of money of that system.

Our present day unit of money is the Federal Reserve Note or dollar bill. A dollar bill is not, however, the same as the dollar of the Constitution. The first is a piece of paper; the latter a weight of silver.

A system of paper fiat debt-money is diametrically opposed to the monetary system of gold and silver coin mandated by the Constitution. Paper money is unsound and unconstitutional.

At the height of the property bubble, California's giant pension fund, Calpers, made a fateful decision: It aggressively poured money into real estate. As a result, today it's one of the biggest owners of undeveloped residential land in America.

Partly because of these investments, California Public Employees' Retirement System is struggling to avoid one of its worst annual declines since its 1932 inception. Calpers has lost almost a quarter of its assets since July 1, the start of the current fiscal year.

The problems come at a time of uncertainty for the nation's largest public pension fund, which has been ...

According to MINOnline, advertising pages in major monthly magazines are down 20% for issues from the first two months of this year. One of the most popular weeklies, The Economist, suffered ad pages losses of almost 30% through the end of last week.

Newspaper advertising revenue at a number of the largest chains fell by 20% last year, and early evidence indicates that ad sales at dailies at companies such as Gannett (GCI) and McClatchy (MNI) continue to fall at a rate at least that sharp this year.

Now there is evidence that online display advertising at major websites is not doing much better. The theory has been that "new media" would outperform print because it is a more efficient and targeted way to reach selected audiences. When a recession is deep enough, that may not matter.

Several online media properties are saying that their advertising revenue is running down between 20% and 30% compared with the first quarter of last year. An analysis of large internet websites shows that this is probably true.

WASHINGTON, January 22, 2009 - The economic slowdown continued to affect U.S. railroads as freight volume declined during the second week of 2009 in comparison with same week last year, the Association of American Railroads (AAR) reported today.

Carload freight totaled 267,063 cars, down 17.9 percent from 2008, with loadings down 13.2 percent in the West and 24.4 percent in the East. Intermodal volume of 199,117 trailers or containers was off 13.7 percent from last year, with container volume falling 10.2 percent and trailer volume dipping 27.0 percent. Total volume was estimated at 28.3 billion ton-miles, off 16.8 percent from 2008.

All nineteen carload commodity groups were off last week in comparison with last year.

For the first two weeks of 2009, U.S. railroads reported cumulative volume of 538,534 carloads, down 17.4 percent from 2008; 403,220 trailers or containers, down 14.0 percent; and total volume of an estimated 57.1 billion ton-miles, down 16.5 percent.

It is one thing when the best-paid people seem to be the smartest and the most accomplished. Those who make much less may not like it, but the differential seems understandable. It is another thing when those people are shown to have committed huge blunders that would have driven their companies out of business, and them into the unemployment line, but for government bailouts.

So it is now with Wall Street. In both Europe and the United States, antipathy toward the bailout is rising amid complaints that the money has not helped the economy by encouraging loans, but has kept the bankers in Champagne and caviar.

Are financial workers overpaid? And if so, will it continue?

The answers, according to a new study by two economists, are yes, they are overpaid, and no, it will not last.

"Wages in finance were excessively high around 1930 and from the mid 1990s until 2006," wrote Thomas Philippon of New York University and Ariell Reshef of the University of Virginia, in a National Bureau of Economic Research working paper released this week, "Wages and Human Capital in the U.S. Financial Industry, 1909-2006."

They forecast that up to half the wage differential observed in recent years "can be expected to disappear.

While I don't agree with the entire piece, the following portion of Hoisington Investment Management Company's The Great Experiment caught my attention :

If there is a desire to increase government spending, the federal government must either increase taxes on the far larger private sector, an option that would presumably be precluded under the present circumstances, or borrow funds in the financial markets that would have gone to the private sector. At this point we have to ask which sector has the better track record of growing the economic pie-private or government expenditures? The private sector has demonstrated the greater flexibility and creativity to expand the economic pie, increasing productivity and thereby improving living standards for all. The risk is that increased federal borrowing will stunt the private sector's ability to grow.

In other words, the attractiveness of Treasuries has increased relative to U.S. equities and corporate debt. As of 2007 (the latest data available), Foreign investors owned $9.1 Trillion in Long Term (i.e. more than 1 year) U.S. Securities, split almost evenly between equities, private debt, and public (Treasury / Agency) debt. If the blue portion of the pie is growing, it is coming at the expense of the red, which explains part of the pressure on corporate spreads and equity prices.

WASHINGTON (AP) -- In a discouraging report for the American economy, General Electric Co. posted a 46 percent drop in fourth-quarter earnings on Friday and warned of a tough environment this year as it struggles with its ailing finance business.

The results cap a difficult 2008 for one of the world's largest industrial companies and point to risks ahead.

GE's businesses touch on most sectors of an economy mired in a recession, from medical equipment and real estate to TV stations. And its longtime profit engine, GE Capital, has seen profits sapped as businesses and consumers limit borrowing or default.

"The environment in total is very tough," GE's Chief Executive Jeff Immelt told analysts on an investor conference call.

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16 Comments

Wonderful unemployment graphic to open things today, Davos (and Luke). It's funny because as I was returning home from an early morning venture today I said to myself, "I have to hop on-line and see if I can find the exact methodology the government used during the '30's to calculate unemployment, so I can really compare apples to apples regarding today's figures."

The chart didn't explain it obviously but it mentions the discrepancy and then adjusts for it -- something like 17.5% if my memory serves me correctly (meaning that would be today's numbers using back-then's methodology).

Ya know, these guys and girls used to be my heros about ten years ago but I feel different about the kind of new,"Pretty People" that are coming out of Wall Street.

In my job I was constantly coming face to face with many well-to-do and celebrity types. Infact, it was my job to greet their corporate jets, park them, bring the limo or rental car to the steps and stand there and smile.

10 years ago it seemed as though the most part of them were in their sixties or better and were very friendly. At times I even got big tips along with a handshake a smile and a "how are you today."

But the ones coming in now are much younger and most of the time arrogant and pushy. I get the feeling as though I am wayyy out of place around them and that's how they want me to feel. Most of them don't even look my way anymore. As if they are saying," I'm not worth their time."

There are still a few of the same older folks still coming in. Still stepping off their HAwker and into a helicopter to take them to their lake house, and they remain friendly as ever. Some of them are still driving their old 1999 fords around town.

But these new one's, I can do without if they want to act like they are better than everyone else.

Just a side note here apropos of my last post that I almost never see mentioned. Unemployment percentages are a percentage of those who are considered to collectively be the "workforce" and not a percentage of the total population. As of now, I believe the starting point number is just under half the population, somewhere in the 135 million range? But even if I'm mistaken and the total were 180 million, the point is equally valid.

Many people don't figure this in and reveal their ignorance of the matter with statements such as this, "Well, even if unemployment gets to 10% that's not so bad because that's only 1 in 10 people in the country not working."

One of the many things Adam Smith seems to emphasize in "The Wealth of Nations" (and, no, I haven't read the entire thing - probably about a third) is that the more people in a country -- in an economic system -- who don't do anything, the greater the volatility, instability, and vulnerability of that system.

Now obviously young children and octogenarians don't work and we need parents to raise those children and care for those octogenarians, but the number of people in America simply running around doing nothing, guzzling gas, and otherwise being good little consumers -- creating trash, wasting resources -- is staggering.

Have you ever been somewhere on your day-off or during a time when you normally work -- the mall, downtown Boston, whatever -- and wondered, "Don't any of these people work?"

I think that is the article with the total number in the work force. I'd be interested to hear what it was in the 1930s, my memory is bad, but I think I read it was about 25% and I thought I read they counted anyone with a job, even if that job was one day a week.

Its funny in a sick way, but now we have the ability to do good stats and here we are jacking them up with seasonal adjustments and birth death rates.

trad, i think i know the type you are talking about. i went to college with these guys, i graduated with a degree in finance with a minor in economics in new york. i graduated in 1999 and i remember everyday how the long island kids would rush into the computer labs and play fantasy stock market, some even opened scottrade accounts and played the real market. the stock market intoxication was everywhere and every newspaper and magazine hyped millionaires under 30. i thought that could be me. i knew it was all gonna end when i made 700% in a month on the fantasy stock market and i was in 1500th place on yahoo!

after graduation everyone in the finance department migrated to wall street, except for me and i graduated cum laude near the top of my class, but i followed my heart (wife) to the midwest. after the bubble burst i don't think these guys learned anything because the street heated up again almost immediately. i haven't talked to my classmates since college but i fight with the thought that i would never be anything like them but the truth is that i would've fallen for it too (queu the violin). thank god i met my wife when i did.

davos, i remember hearing sometime ago that they included job-sharing in their employment figures in the 1930's. so a single job was split between 2-3 guys so that more families could be helped by the benfits of one job.

Microsoft to cut 5,000 jobs after falling $1bn short of sales targets

By Stephen Foley in New YorkFriday, 23 January 2009

Microsoft, the software giant, shocked
the tech industry by missing its sales targets by almost $1bn (£720m)
in the final months of last year, saying the economy was more
challenging than at any point in the company's history.

Its shares plunged to levels not seen in more than a decade, after
the creator of Windows and Word said that the personal computer market
was sluggish and that businesses were increasingly turning to low-cost
"netbooks", which run cheaper or free operating software.

Good article on FInancial Coup D'etat and your 401K, Davos and Damnthematrix. It makes me sick to think of how many of us are getting jammed by having our life savings locked into IRAs and such, where we can't even attempt to move them to safety (without losing our jobs).

THE
BOMB IN THE CHRISTMAS STOCKINGSMisplaced
fears are the most dangerous of all

Darryl
Robert Schoon

The Muslim terrorists of
Mumbai are not our greatest threat nor will they cause the greatest
suffering in the days ahead. That which will cause the greatest grief is
the banker's system of credit-based paper money, a house of cards now in
flames and about to burn all inside who still believe it to be shelter
instead of a charnel house.

Those who have attended
Professor Antal E. Fekete's Gold Standard University Live (GSUL) are not
found around corporate watering holes discussing stock tips. Although
aware of the markets, those in attendance have their focus on the system
itself, on what caused its problems and what can be done to correct
it.

Last June at Session IV of
GSUL a group of Hungarian bankers were in attendance. I asked one why they
had come to hear Professor Fekete. His answer was unusual, at least for a
banker. He answered that they had realized their models could not explain
current markets and, as a consequence, they were looking for models that
could do so.

When most people are
confronted with the inexplicable, instead of looking for other
explanations they instead attempt to explain away what is happening. In
times of systemic stress, the usual response is denial. The Hungarian
bankers were obviously an exception.

What is extraordinarily
dangerous today is the ubiquitous ignorance that exists about our
financial system. Those who benefit the most from the current monetary
pathology-bankers and government-through their influence in the
corporate-controlled media and academia have effectively hidden the cause
of society's problems from society itself.

By controlling the content and
direction of social and academic dialogue, the present beneficiaries of
our credit-based system of paper money have effectively prevented any real
response to correct that which is now our greatest threat-the collapse of
the global economy which will bring unimaginable suffering to most of
humanity, a collapse that is now upon us.

The bankers' influence over
government and the media has effectively stifled social and academic
discussion about the real cause of our problems. Those who live off debt
do not want its origins and their influence exposed to the light of day.
As a consequence, society will suffer immensely though ignorant of the
reasons why-which is exactly what bankers and governments
prefer.

A
DEPRESSION PLUS

We are about to experience a
depression in extremis. Although similar to the Great Depression, what is
about to happen has never happened before; we are about to experience
something new, a depression in combination with a currency collapse,une Grande Dépression à la
papier-monnaie.

Ralph T. Foster's important
book, Fiat Paper Money-The History And
Evolution Of Our Currency notes that paper money first appeared
in China, which is also the first country to later ban its
use.

Over the
course of 600 years, five dynasties had implemented paper money and all
five made frequent use of the printing press to solve problems. Economic
catastrophe and political chaos inevitably followed. Time and time again,
officials looked to paper money for instant liquidity and the immediate
transfer of wealth. But its ostensible virtues could not withstand its
tragic legacy; those who held it as a store of value found that in time
all they held were worthless pieces of paper. Page 29, Ralph T. Foster,Fiat Paper Money-The History And
Evolution Of Our Currency, to order email
tfdf(at)pacbell.net

While good ideas often spread,
terrible ideas do also. Eventually, the "virtues" of paper money were too
great for the West to resist; and like another Chinese invention,
gunpowder, paper money was to be used in the pursuit of wealth, empire
and, ultimately, war.

But, in the beginning, the
West was highly dubious of this alleged Chinese invention. Foster's book
notes that the first mention of paper money in the West was found in Marco
Polo's account of his travels. The chapter heading which refers to paper
money begins:

"HOW
THE GREAT KHAN CAUSETH THE BARK OF TREES, MADE INTO SOMETHING LIKE PAPER,
TO PASS FOR MONEY OVER ALL HIS COUNTRY"

The idea that the bark of
trees could pass for money was met with disbelief, derision and ridicule
in the West. Such a possibility was considered as absurd as the more
modern idea that $ 1.5 trillion of subprime "don't ask, don't tell"
mortgages could be sold to banks, pension funds, and insurance companies
as risk-free AAA investments.

The use of paper money was
formally abolished in China in 1661. But, like the proverbial bad penny,
it reappeared again in the 1900s. Bereft of alternatives, China
wholeheartedly embraced the West's paper-based credit markets believing
that perhaps in its 300 year "journey to the west" paper money had picked
up some "western mojo" along the way.

Unfortunately, as China is
about to discover, paper money was no more viable upon its return than in
1661 when it was banished. Once again, economic catastrophe and political chaos will
follow-this time on a global
scale.

Foster also points out that
although Kubalai Khan's methods of encouraging the use of paper money were
brutal, i.e. the penalty for not
accepting paper money in trade was death, the Great Khan was
certainly not ignorant in the ways of money, as Marco Polo
noted:

But what
really captured Polo's attention was how all the gold and silver went to
the imperial treasury, while the population gladly received
paper.
Page 41, Ralph T. Foster, Fiat Paper
Money-The History And Evolution Of Our Currency, to order email
tfdf(at)pacbell.net

WE
KHAN TOO

Today, paper money is more
common than herpes and far more dangerous (and hopefully not with us
forever). When paper money loses its value, economies collapse which is
now about to happen.

Kubalai Khan's experiment with
paper money, however, gives us an important clue about what to do. As long
as everyone accepts paper money, we should exchange our paper money for
goods and services. But, like Kubalai Khan, our savings should be held in
gold and silver.

WHAT
LIES AHEAD

A depression is now beginning.
The last depression, i.e. the Great Depression, lasted approximately ten
years. While it is not possible to know how long this depression will
last, we do know this depression will be much worse than the 1930s. It
will be a depression in
extremis, a depression in combination with a currency
collapse.

The US dollar is a now a fiat
currency, a paper coupon issued by the US government stating it is legal
tender. Without the ink, however, it is similar in all respects to Kubalai
Khan's currency which started out as the bark of a tree made into
something like paper to pass for something like
money.

When the US dollar was
accorded the status of a reserve currency by the Bretton-Woods agreement
in 1944, it was convertible to gold upon demand by other nations. Today,
it is convertible only to whatever speculators decide. Someday, as with
all fiat currencies, it will be zero.

Some believe that a US default
on its debts will occur this year. Such a default may or may not happen
soon but it will happen someday. When the US allowed private bankers to
issue the US dollar (via the Federal Reserve in 1913) thus changing the
dollar from a savings based currency to a debt based currency, the death
warrant of the US dollar was signed. Its burial was only a matter of time,
a time which has almost arrived.

It has been less than one
hundred years since bankers and businessmen conspired to create the
Federal Reserve Bank to control America's finances and to profit from the
economic expansion of this once great economic
power.

The consequences of that
conspiracy are now around us-a collapsing dollar, a collapsing economy
and, now, a collapsing nation. Using soundbite slogans, the bankers
convinced Americans that its markets were free while they controlled the
markets through the issuance of credit.

Thomas Jefferson warned about
what would happen if private bankers controlled America's currency.
Jefferson's warnings were ignored, forgotten and buried by the press,
academics and politicians who were paid to promulgate the false promises
of bankers. Americans took the bait, swallowed it and are now about to be
flayed.

THE
BANKERS SINK WITH THE SHIP
BERNARD MADOFF-THE POSTER BOY OF
DEREGULATION

The irony is that, today,
bankers themselves are being destroyed by the very system they created.
The excessive issuance of debt-based money by bankers is destroying
bankers and banks as well as businesses, families, and
governments.

Bankers' influence turned
government oversight into culpable blindness giving bankers the rope they
needed to hang themselves. The soundbite of self-regulation ultimately
spawned the largest Ponzi scheme ever, a decades long $50 billion theft by
investment banker and former NASDAQ Chairman Bernard Madoff-accomplished
directly beneath the blind eye of SEC
oversight.

Madoff's extraordinary
accomplishment is the pièce de
résistance to the hallowed soundbite of free markets. I am a
strong believer in freedom and free markets but only fools and dupes
believe that today's credit driven financially manipulated markets are
free. Follow the money, not the soundbites. Follow the truth, not the
bullshit.

CHRISTMAS
AND THE COMING NEW YEAR

This year's holiday season
will not be like last year's, i.e. "the last happy Christmas". Americans
especially have been living in a self-induced bubble of illusion and
denial which has now popped along with the real estate and stock market
bubbles.

Reality is finally beginning
to dawn on those who believed their denial would save them from what they
fear. What is happening is a surprise only to the indentured slaves of
debt who believed the banker's promise that credit would give them their
dreams; instead, that credit has now become debt and their dreams have
become nightmares.

The past year has destroyed
the illusion of eternally expanding growth driven by eternally expanding
credit. Salome was never so attractive; but now, society must pay the
price for having succumbed to the bankers' beckoning pole
dance.

Only if we learn from history
will we not repeat it. But if China's experience with paper money is any
indication of mankind's learning curve, I suggest you put your savings
into gold and silver-and soon.

Lawmakers may insert earmarks to buy new military
equipment into a massive economic stimulus plan being
pushed by the Obama White House, said Sen. Mitch
McConnell, R-Ky., the Senate minority leader.

"There has been talk of a military equipment portion
of the economic stimulus bill," McConnell said during
a Jan. 23 appearance at the National Press Club in
Washington.

The Obama administration and leaders in both chambers
of Congress are working to find agreement on an $850
billion economic stimulus.

Some economists, like Martin Feldstein, who was
chairman of the Council of Economic Advisers under
former President Ronald Reagan and is now a Harvard
University professor, argue that using the stimulus
plan to buy more military items from now until about
2011 would give the economy a needed - but temporary -
shot in the arm. By the end of that span, the economy
should be back on track and the increase in military
purchases could be stopped, he said.

Feldstein pitched this idea in a Dec. 24 Wall Street
Journal column.

Since Congress returned to work earlier this month,
lawmakers have forecasted that the stimulus plan would
likely include additional defense dollars, but for
"shovel-ready" construction projects.

McConnell was responding to a question from an
audience member at the press club; the question was
specifically about recommendations by some economists
that using stimulus plans to purchase military
equipment would boost the ailing U.S. economy.

Schoon is on my list of writers I read whenever they publish on the public domain. His subscription service is pretty expensive, though his website has a lot of good past articles of value for inquiring minds.

WASHINGTON (AP) -- In a discouraging report for the American economy,
General Electric Co. posted a 46 percent drop in fourth-quarter
earnings on Friday and warned of a tough environment this year as it
struggles with its ailing finance business.

G.E. clearly illustrates a major problem with our economy - like most mega-companies, GE takes profits and plays in the Wall Street Casino and invests in off balance sheet deals rather than developing and producing products.

And why not? The financial sector of our economy has grown to bullying proportions and the average 17% profit strips away corporate desire to produce more tangible products.

Why pretend we need to spend all that energy building weapons? Can't we find a way to simply stuff this money directly down the throats of the the military industrial complex? Why waste all those precious resources building worse then useless weapons to defend ourselves against our own concocted fictions?